Part II
THE LATE FALL IN THE VALUE OF SILVER

Part II, Chapter VIII

The Production of Gold since 1850

II.VIII.1

§ 1. The reason for making so considerable a digression in our story of the bimetallic experiences of the United States as to discuss the action of France, Germany, India, and the Latin Union in the chapters of Part II, is to make it possible to get a rational view of events in the United States in the period subsequent to 1873. There came into the monetary world, beginning in 1872 and amounting to a panic in July, 1876, a most unusual disturbance in the silver market. Nor did silver recover itself after 1876. The depreciation brought with it frequent fluctuations in value, which have ended in a generally lower level; and, in September, 1885, the fall was almost, if not quite, as low as in July, 1876. So far as it has become a matter of public discussion, bimetallism dates from this monetary event. In our country the fall of silver introduced the declining metal into politics, in Europe it has excited great discussion, and led to the meeting of two International Monetary Conferences—one in 1878, another in 1881. It becomes highly essential to the history of bimetallism in the United States,—if we are to understand its movements with some show of insight, to know what the facts were which affected the value of silver in Europe and the East, and to try to reach some conclusion as to the probable cause of the extraordinary fall. We could then know better how to judge the actions of the United States in the field of its monetary policy.

II.VIII.2

§ 2. In a preceding chapter, while discussing the act of 1853, we had occasion to speak of the gold discoveries in the United States and Australia. The importance of these discoveries, and their social and economic influences, are now well recognized; but our nearness to the events has concealed, perhaps, some of their effects, or at least public attention has not been called to them. The economic influences have been discussed by the ablest writers.*1 The effect upon contracts and obligations of long standing of an enormous production of gold has been fully considered. Mr. Cairnes has, in a series of remarkable essays, explained the process by which the new wealth was distributed from the gold-producing countries over the remainder of the world and has given an exposition of the social and economic changes which were produced by this action. Mr. Jevons demonstrated beyond any reasonable doubt that the increase of the gold production had resulted in a fall of its purchasing power of at least 9 per cent, and probably of 15 per cent. It will not now be questioned, I think, that a change was produced in the value or purchasing power of gold; in other words, that it bought less of other goods than before 1850. That is, gold prices rose, without implying an increase in the cost of production of articles for which the gold was exchanged.

II.VIII.3

There is no sacredness about the value of gold. Even though some persons think its value is absolutely stable, this belief must have been destroyed by the events which have happened since 1848. It is true people in general do not think gold changes in value, or at least they think it changes very little. And there is no doubt whatever that it is the least changeable of the two metals. It must, however, be frankly admitted that both the precious metals have within thirty years shown that, like other commodities, they are affected by ordinary forces, and vary in their normal value under the same laws which control the valve of other things. In short, when it is admitted that both gold and silver are capable of a change in value, due to unforeseen but natural causes, a step forward has been made in the discussion of bimetallism. Without doubt silver has changed in value more easily than gold. And, if either gold or silver change in value because of natural forces, it makes it impossible to keep both of the metals at such a permanent relation to each other as will maintain an invariable ratio. The events of 1848 and subsequent years are cumulative proof of this position. Moreover, as we shall soon see, the change in the value of one metal produces, ipso facto, a change in the other. The intimate connection of the two metals causes reflex changes upon each other; yet the action of silver upon gold is not the same as the action of gold upon silver.

II.VIII.4

In this chapter I shall confine myself to stating the actual facts of the gold production; to marking the influence of this production on the relative values of the two metals; and, later, to discussing their effect upon our question of bimetallism in the United States. We have already seen one effect in the establishment in 1853 of a single gold currency in this country. Silver was driven out, and we gladly accepted gold in its place. In brief, the United States was the first country of the world to take advantage of the new production, and from its surplus treasures to secure for itself a gold currency. We shall soon see hove the same thing was accomplished in other countries.

II.VIII.5

§ 3. The magnitude of the gold production since 1850 is the marked characteristic of this period. The annual yield of gold in past centuries has been insignificant in comparison with the annual production in the years following the discoveries in Australia and California. Some years before, the Russian mines had been increasing the supply; but from a production of about $15,000,000 a year in 1840, the supply rose to more than $150,000,000 a year soon after 1850. This phenomenon, moreover, was accompanied by an increase in the production of silver of from 25 to 50 per cent a year. The comparative extent of the new gold production may be seen by Chart IX, previously mentioned, which gives the yield from the mines in the years since the discovery of America. The sudden and remarkable ascent of the gold product on the chart after 1850 is all the more noticeable because of the comparison with previous years. In fact, the gold production is the striking feature in this portion of our monetary history.

II.VIII.6

The figures which have been collected at length in Appendix I give information only as to the annual supply. No confidence is to be placed in guesses as to the amount of the precious metals actually in existence in 1848, or in any other period. In the nature of things we can not know how much has been irretrievably last, consumed in the arts, or for ever withdrawn from money uses. The estimates made are worthless as statistics from which generalizations can be drawn in regard to the effects of the new supply upon the value of the two metals. The statistics of the annual supply are more trustworthy, although even these vary with every authority. No two persons agree even in regard to the annual supply. In the period preceding 1850*2 I have used the figures prepared by the distinguished German economist, Dr. Adolf Soetbeer. In regard to the annual production since 1850, I have carefully collated all the tables which have been compiled by leading authorities in Germany, England, France, and the United States, and placed them in parallel columns for comparison. It will be noticed that Soetbeer's figures are larger than those of any other authority, and yet I am inclined to think that they are not far from the truth. In considering the total production of gold and silver in the years between 1850 and 1876, it will be found that there is a rough correspondence in the totals. That the figures are approximately correct there can be little doubt, and they will, therefore, serve our general purpose. The reader will consequently have in these tables all the necessary data for a knowledge of the extraordinary gold production since the middle of the present century. It is the third great increase in the production of the precious metals, of which the first occurred soon after the discovery of America, and the second at the close of the last century. The first two lowered the value of silver relatively to other articles, including gold; the last lowered the value of gold relatively to other articles, including silver; but, then, later it had another effect on silver itself.

II.VIII.7

§ 4. Inasmuch as gold and silver are known to have changed in value, like other commodities, under the influence of a lowered cost of production, which has increased the supply and so the total quantity in existence, we are led at once to discuss briefly the reasons which give gold and silver value as money. Any commodity has value which is limited in quantity and yet satisfies some human desire. Apart from their power to please as ornaments and for uses in the arts, gold and silver satisfy certain desires arising from the need of a medium of exchange. The inconveniences of barter gave rise to desires for money. The metals which have best satisfied these desires are gold and silver.*3 The business world desires as money a metal which is as stable in value as possible, and which remains in this condition for as long a time as possible; one which has considerable value in small bulk, especially where transactions are large; and which possesses the other accepted qualities, such as homogeneity, divisibility, cognizability, etc.

II.VIII.8

Steadiness of value, as we saw in Hamilton's report, is popularly supposed to belong to gold. Moreover, in great centers of commerce and trade, where the total of transactions rose to great sums, gold was preferred to silver because of its smaller bulk. Then, as credit devices grew and extended, the actual handling of the metal was saved by the use of banks of deposit. The business world began to shun a cumbrous medium, and at the same time to cling to what was believed to be most stable in value. Without now asserting that one metal is more stable than the other in value, what I do assert is that monetary history reveals in every modern commercial country a prejudice in favor of gold as against silver. Granted that it is only a prejudice, yet, whatever it may be termed, it exists. The world of commerce, whatever the reason may be, believes in gold. Nor will we say whether this belief is fortunate or not. It is our endeavor only to ascertain the fact. But it is a fact which must be taken into account in discussing the influence of the gold discoveries on the values of gold and silver. The proof of it will be found as we go on with our story. It has already been displayed in the legislation which gave the United States a gold currency in 1853. In brief, gold satisfies the desires of men for a medium of exchange better than silver. This is not a theoretical proposition. It is simply a fact to be ascertained by a historical inquiry.

II.VIII.9

If, then, it be true that men in trade have a greater desire for gold than for silver as money, this is the cause of a demand for gold; since demand is a desire for a commodity coupled with purchasing power. This desire for gold is the desire for it as a medium of exchange.*4 That is, if men of business are left to seek the metal they naturally prefer, gold will be chosen. Now, however, the law of a land, which fixes a legal-tender value of a given amount upon one or the other metal, can, through the operation of Gresham's law, bring into circulation the cheapest metal, whether the community has a preference for it or not. But whenever the state follows the wishes of its people, if it is a commercial state, it will be found that there is a very strong tendency among its population to the adoption of gold in preference to silver. In other words, although law can override popular wishes in this respect and decide that the cheapest metal shall be used, the natural forces governing demand still exist, and will, sooner or later, make themselves felt. It is quite unlikely, therefore, that there will be any falling off in the demand for gold for money uses. The only question, as all must admit, is rather, whether the supply will be sufficient or not. Law can create a demand for the metal, which would not naturally be chosen, only by overvaluing it in its legal ratio, and thus making it profitable to drive the preferred metal from use. The gain of the money-changer can be absolutely depended upon to bring this about. But if both metals were put upon an equal basis at the Mint—if such a thing is possible for any time—it will be found that gold is preferred in large payments and silver for small payments. The natural convenience of a trading population demands this. A comparison of the countries which use silver—China, India, and semi-civilized countries with the important commercial states—England, Germany, and the United States—which use gold, affords a striking illustration of this proposition.

II.VIII.10

§ 5. Setting before us as an object to discover the reasons for the fall in the value of silver in 1876—which has been the beginning of modern bimetallic discussions—we shall confine ourselves to the effect which the great production of gold has had upon the value of silver. And to this end we must bear in mind what has been said in the last section in regard to the prejudice for gold. Then there must be taken with this preference for gold the possibility of satisfying the demand. The amount of gold produced, therefore, is an important part of our problem. We should then proceed to get some idea of this amount.

II.VIII.11

We find ourselves, in the period following 1850, confronted with an enormously increased production of gold. How enormous it was I do not think has been generally recognized in our monetary discussions, particularly of late in those dealing with the appreciation of gold. It seems almost incredible to say that, in the 25 years following 1850, as much gold was given forth by the mines as had been produced to that time since the discovery of America by Columbus. And yet it is literally true:

GOLD.

SILVER.

1493-1850

$3,314,553,000

$7,358,450,000

1851-1875

3,317,625,000

1,395,125,000

II.VIII.12

The facts may be more conveniently seen in their proper relations in Chart X, which represents, first, by square areas, the total quantities of gold and silver*5 produced since the discovery of America down to 1850. During this time of 357 years it will be seen that more than twice as much silver as gold, in respect to value, was produced. And we have already seen that in this period there occurred two great falls in the value of silver, or at least an almost continuous fall of silver (see Chart IV). But what is remarkable is that—while gold to an amount so much more than enough for the ordinary uses of commerce was produced from 1493 to 1850 that it fell in its purchasing power—in the 25 years succeeding 1850 an amount equal to the product of the previous 357 years was suddenly added to the existing stock of the world. This was an amount far more than was necessary for the growth of trade and population in those 25 years, and, as Prof. Jevons has shown, it resulted in a loss of its purchasing power of from 9 to 15 per cent. The wonder is that its value did not fall more; and it would have fallen more if it had not been for the influences which, as we shall later see, widened the field for its use. Chart X, in the second place, shows an area, for the period since 1850 as great for gold as in the previous period; but, while in the previous period the area for silver was twice as large as that of gold, in the later and short period of 25 years the silver product is less than one half as much as that of gold, and about one fifth of the silver product from 1493 to 1850.

II.VIII.13

§ 6. Now what was the effect upon the relative values of the two metals of suddenly doubling the quantity of gold, without anything like a proportional increase of silver? First of all, gold fell in value, both in regard to silver and to all commodities. The ratio between gold and silver, which had risen from 1:15 to 1:16, now showed the effect of the cheapening in gold by dropping to 1:15.3 for a time. This was the first effect. But a second effect soon became visible. The cheapened gold began to drive out silver from the currencies of the United States and Europe, because, at former ratios fixed before the gold discoveries, gold was overvalued at the mints, and so by Gresham's law came into circulation as the sole medium of exchange. But the matter worthy of most attention is that this exchange of gold for silver was seen and watched, not only without opposition, but even with satisfaction. Had there been a similar flow of silver into the place of gold, there would have been no such complacency. Here, again, is the preference for gold which we find so constantly present. The effect of this movement was, of course, to prevent gold from falling in value as much as it would otherwise have done; and to withdraw the previously existing demand from silver for use as a medium of exchange in Western commercial nations. The very cheapness and abundance of gold increased the demand for it for use as a medium of exchange, and ipso facto diminished the demand for silver. The world could choose between the two. There was silver enough; but, as soon as gold became plentiful, there was no doubt for a moment which metal was preferred. It was in the same spirit in which the modern world made choice between the railway and the stage-coach as a means of transportation. Wherever choice was possible, the best and most convenient means of locomotion was taken. The same idea has been expressed by Mr. Cairnes*6 in the following words:

"If anything unfits one commodity for measuring the value of another, it is the circumstance that they may both be applied to common purposes. No one would think of measuring the fluctuations in wheat by comparing it with oats, because, both grains being employed for the same or similar purposes, any change in the value of one is sure to extend to the other. When, e.g., the wheat crop is in excess while the oat crop is an average one, it always happens that a portion of the consumption, which in ordinary years falls upon oats, is thrown upon wheat, the effect of which is at once to check the fall in the price of the more abundant grain, while, by diminishing the need for the other, it causes it to participate in the decline. The influence of the increased abundance of one commodity is thus distributed over both, the fall in price being less intense in degree in proportion as it is wider in extent. Now this is precisely what is happening in the relations of gold and silver. The crop of gold has been unusually large; the increase in the supply has caused a fall in its value; the fall in its value has led to its being substituted for silver; a mass of silver has thus been disengaged from purposes which it was formerly employed to serve, and the result has been that both metals have fallen in value together, the depth of the fall being diminished as the surface over which it has taken place has been enlarged. The scene on which this interchange of gold and silver has hitherto been exhibited on the largest scale is the currency of France, in which, owing to the existence of a double standard,... one or the other metal is employed according as its worth in the markets of the world happens to vary in relation to its valuation at the French Mint."

II.VIII.14

In succeeding chapters we shall find abundant evidence of this interchange of gold and silver, which was begun by the United States in 1853. At the present we shall go on to narrate how France followed this example; and subsequently we shall see how Germany did the same. Then it will remain to show how the Latin Union was forced to follow practically the same course.

II.VIII.15

§ 7. The first marked effect of the new gold on the currencies of Europe was seen in France, furnishing again a very striking illustration of Gresham's law.

II.VIII.16

Since 1803 a legal ratio of 1:15½ had been maintained by France without change. Inasmuch as the market ratio had never been as low as 1:15½ between 1820 and 1850, but rather nearer 1:16, the French legal ratio gave gold a less value in the form of coin than it possessed in the form of bullion, while silver was given a greater value in coin than it possessed as bullion. As a natural consequence, gold disappeared from circulation and silver took its place; so that by 1850 the main part of the circulation in France consisted of silver.

II.VIII.17

The discoveries of gold exactly reversed this situation. Gold fell in value; its relation to silver changed so that the ratio remained below 15½ until 1867 (see Chart XIII. Under these conditions, consequently, a revolution took place in the French currency between 1853 and 1865. As things then stood, the ratio at the Mint was still 1:15½, while in the market it was lower than that, or somewhat nearer 1:15. As a consequence of this, money-changers quickly saw that an ounce of gold exchanged for 15½ ounces of silver in the shape of coin, but for less than 15½ ounces of silver in the shape of bullion. That is, gold was now overvalued by the legal ratio (as silver had been before); and in the form of bullion silver bought more of gold than it did in the form of coin. Consequently, as long as this state of affairs continued, and since "free coinage" existed, there was a stream of gold flowing to the French Mint for coinage, while the silver rapidly disappeared from circulation, and even left the country. How this process went on may be seen by the following table (accompanying Chart XI), which gives in millions of dollars the excess of exports and imports from and into France*7 after 1849:

GOLD.

SILVER.

YEARS.

Excess of imports.

Excess of exports.

Excess of imports.

Excess of exports.

1849

1.2

. . . .

48.8

. . . .

1850

3.4

. . . .

14.6

. . . .

1851

17.0

. . . .

15.6

. . . .

1852

3.4

. . . .

. . . .

0.6

1853

57.8

. . . .

. . . .

23.4

1854

83.2

. . . .

. . . .

32.8

1855

43.6

. . . .

. . . .

39.4

1856

75.0

. . . .

. . . .

56.8

1857

89.2

. . . .

. . . .

72.0

1858

97.6

. . . .

. . . .

3.0

1859

107.8

. . . .

. . . .

34.2

1860

62.2

. . . .

. . . .

31.4

1861

. . . .

4.8

. . . .

12.4

1862

33.0

. . . .

. . . .

17.2

1863

2.4

. . . .

. . . .

13.6

1864

25.0

. . . .

. . .

8.4

1865

30.0

. . . .

14.4

. . . .

1866

93.0

. . . .

9.0

. . . .

1867

81.8

. . . .

37.8

. . . .

1868

42.4

. . . .

21.8

. . . .

1869

55.0

. . . .

22.4

. . . .

1870

23.8

. . . .

7.0

. . . .

1871

. . . .

42.8

3.0

. . . .

1872

. . . .

10.6

20.4

. . . .

1873

. . . .

21.6

36.2

. . . .

1874

86.2

. . . .

72.0

. . . .

1875

90.8

. . . .

38.8

. . . .

1876

100.6

. . . .

29.8

. . . .

1877

87.2

. . . .

20.8

. . . .

1878

47.2

. . . .

23.8

. . . .

1879

. . . .

35.0

15.2

. . . .

1880

. . . .

42.6

7.8

. . . .

1881

2.2

. . . .

10.2

. . . .

1882

18.4

. . . .

18.2

. . . .

II.VIII.18

During the years from 1852 to 1864 France absorbed through direct imports about $680,000,000 of gold, and ejected about $345,000,000 of silver. The French mints were actively engaged in coining this gold into the form in which its legal value was greater than as bullion.

II.VIII.19

The effect of this great absorption of gold by France on the value of silver is thus fully noticed by Mr. Cairnes*8 while the movement was going on in 1860:

"Until a recent period the metal which formed the staple of the French currency was silver, but, owing to the fall in the value of gold, consequent upon the discoveries, gold is now [1860] rapidly taking its place and becoming the principal medium of circulation. Up to the year 1852 the importation of silver into France was always largely in excess of its exportation; but in that year the tide turned, and has since continued flowing outward with increasing volume. M. Chevalier states that by the end of 1857 France had parted with 45,000,000l. sterling of silver. On the other hand, during this time she had coined more than 100,000,000l. sterling of gold. The currency of France has thus, to borrow the curious but not unapt figure of our author, played toward gold the part of a parachute to moderate its descent. But in proportion as gold has thus found a market, silver has been deprived of one; and the 45,000,000l. of silver liberated from the currency of France is as much an addition to the disposable supply in the world, and tends as effectually to lower its value, as if it had been raised immediately from the mine. The fall in the value of gold has thus, up to the present time, been at once checked and concealed—checked by being substituted for silver, and concealed by being compared with it."

Notes for this chapter

Levasseur, "La Question d'Or"; Jevons, "A Serious Fall in the Value of Gold Ascertained"; Chevalier, "On the Probable Fall in the Value of Gold"; Stirling, "Gold Discoveries and their Probable Consequences"; McCulloch, "Precious Metals" in the "Encyclopedia Britannica"; and, above all, Cairnes, "Essays in Political Economy," the first four chapters.

Cf. Mill's chapters on Money, and Jevons's "Money and Mechanism of Exchange," chap. iii, for an explanation of the functions of money and the proper qualities possessed by a metal used as a medium of exchange.

End of Notes

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